Report of the Commission on Government ... - Bayhdolecentral

Selected Issues <strong>of</strong> LiabiIity
and <strong>the</strong> extent to which <strong>the</strong> Government, or
its suppliers, should bear such a risk.
THE ROLE OF INSURANCE
Most suppliers carry some form <strong>of</strong> general or
product liability insurance providing financial
protection for claims resulting from loss or
damage caused by defective products. However,
we have been unable to obtain detailed data on
specific types and amounts <strong>of</strong> coverage. Despite
<strong>the</strong> lack <strong>of</strong> specific details regarding premium
costs and <strong>the</strong> extent <strong>of</strong> product liability coverage,
a number <strong>of</strong> basic facts about product
liability insurance and insurance practices can
be verified.
"Product liability" is commonly understood
to mean liability <strong>of</strong> a contractor for injury to
persons or property caused by its defective
products, and includes liability to third parties
who are not parties to <strong>the</strong> contract. Such liability
to third persons is insurable, and most
manufacturers and suppliers carry product liability
insurance for third-person liability.
However, product liability insurance is not intended
to be a guarantee <strong>of</strong> good workmanship;
it does not normally cover loss <strong>of</strong> or damage to
<strong>the</strong> product itself nor <strong>the</strong> cost <strong>of</strong> repair, replacement,
or removal <strong>of</strong> <strong>the</strong> product.
Military aircraft, missiles, space systems,
and o<strong>the</strong>r complex products, including spare
parts and components, which are destroyed or
severely damaged, are not generally included
in <strong>the</strong> premium rate <strong>of</strong> <strong>the</strong> manufacturer and
its component manufacturer's product liability
insurance coverage.
Nei<strong>the</strong>r commercial nor Government product
liability insurance covers <strong>the</strong> "business risk"
<strong>of</strong> <strong>the</strong> failure <strong>of</strong> a product to perform its
intended purpose due to improper design or
specification. An example <strong>of</strong> an uninsurable
business risk is <strong>the</strong> costly recall situation, or
"sistership" liability, such as liability caused by
<strong>the</strong> grounding <strong>of</strong> all aircraft <strong>of</strong> <strong>the</strong> same type.
It is not uncommon for <strong>the</strong> product liability
insurance carried by industry to cover both its
commercial and Government work. This is esipecially
true at <strong>the</strong> subcontractor and supplier
I.evel.
The premium costs for product liability. innirance
are determined or structured by loss
rxperience, and experience with a particular
company is nearly always <strong>the</strong> major or controlling
factor in setting premium rates. Costs
for premiums are reflected in contract pricing
through a number <strong>of</strong> different accounting methods.
Often, such premium costs are allocated
to an overhead expense pool which is <strong>the</strong>n
prorated as part <strong>of</strong> an indirect expense rate
against all contracts. Sometimes costs may be
charged as a direct expense to a contract. Some
companies segregate amounts for military insurance
coverage from commercial coverage.
Because premium costs are determined by
loss experience and <strong>the</strong> exposure to liability
for such losses, <strong>the</strong>re is a direct relationship
between costs paid by <strong>the</strong> Government in its
contract prices (directly or indirectly) and
<strong>the</strong> amount <strong>of</strong> damages it recovers as a result
<strong>of</strong> loss or <strong>of</strong> damage to Government property.
PRICING
Finally, <strong>the</strong> present uncertainty and vagueness
<strong>of</strong> <strong>the</strong> extent <strong>of</strong> contractor and supplier
liability for loss <strong>of</strong> or damage to Government
property have made it difficult to price <strong>the</strong>
risks involved adequately or accurately.
Warranties in Government contracts pose a
nearly insoluble pricing problem. While Government
policy allows <strong>the</strong> inclusion <strong>of</strong> a factor
in <strong>the</strong> price to cover <strong>the</strong> cost <strong>of</strong> including a
warranty, <strong>the</strong> contractor's difficulty is one <strong>of</strong>
establishing some reasonable basis for predicting
warranty costs for a product being produced
for <strong>the</strong> first time. The problem is fur<strong>the</strong>r
complicated because postacceptance Government
remedies are provided for in so many different
standard clauses and are stated to be "nonexclusive";
that is, are merely remedies in addition
to whatever o<strong>the</strong>r remedies may exist under
<strong>the</strong> law.
CONCLUSIONS
A lack <strong>of</strong> a clear and explicit definition <strong>of</strong>
postacceptance rights <strong>of</strong> <strong>the</strong> Government and
obligations <strong>of</strong> contractors and suppliers increases
<strong>the</strong> probability <strong>of</strong> disputes and litigation.
It places indefinite risk on contractors
and suppliers because <strong>of</strong> <strong>the</strong> inability to predict
or determine <strong>the</strong> extent <strong>of</strong> <strong>the</strong> exposure to
liability. Fur<strong>the</strong>r, <strong>the</strong> lack <strong>of</strong> a clear statement
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